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Following upon the November judgment in Re APCOA Parking Holdings GmbH, last week Mrs Justice Rose sanctioned a scheme of arrangement between the Dutch company DTEK Finance B.V. (“DTEK”) and holders of notes issued by DTEK in 2010 (the “Notes”). This is notable in that it reinforces the finding in APCOA that a non-English company without substantial connection to England can nevertheless avail itself of an English scheme of arrangement by changing the governing law in its note documents to English law. A copy of the DTEK judgment can be found here.

Background

DTEK is part of a group of energy companies generating and selling electricity to customers in Ukraine and elsewhere. DTEK initially issued the Notes in 2010 under New York law but due to various financial difficulties did not think it would have the resources necessary to repay the Notes when they matured in April 2015. Given the impending maturity date, DTEK put together a proposal for its noteholders whereby DTEK would acquire and cancel the Notes in exchange for giving the noteholders new notes for 80% of the par value with a 2018 maturity date, and a cash payout for the remaining 20% of the Notes (the “Proposal”). Under the terms of the Indenture, the Proposal could be approved without court sanction if 98% of the Noteholders agreed to it.

On 23 March 2015 DTEK launched an exchange offer and consent solicitation requesting consent to the Proposal and also “invited noteholders to agree to certain changes in the terms of the [Notes], including a change of the governing law [from New York] to English law” to enable DTEK to pursue a scheme of arrangement if sufficient agreement to the Proposal was not obtained (the “Consent Solicitation”). DTEK received agreement from 91.1% to the Consent Solicitation, which was not enough to approve the Proposal but was enough to change the governing law to English law thus enabling DTEK to avail itself of an English scheme of arrangement and restructure the Notes as set out in the Proposal notwithstanding its inability to receive the 98% acceptance to the Proposal as required under the Notes documents.

Permission to convene a meeting of noteholders was granted by Nugee J, and the meeting of the noteholders was held on 23 April 2015. The scheme was approved by over 90% of the noteholders at the meeting.

The Sanction Hearing

At the sanction hearing on the scheme, the court focused its analysis on jurisdiction and considered whether the change in governing law of the Notes from New York law to English law was a sufficient connection to England to grant the courts of England jurisdiction and justified an exercise of her discretion to approve the Scheme.

Rose J began by affirming that an English governing law clause in a debt instrument was a sufficient connection for the purposes of establishing jurisdiction. She then turned to whether the connection with England was any less sufficient in the present case because English law was not the original governing law and the change to the governing law was made only a few weeks prior to the sanction hearing and done solely to allow DTEK to use a scheme of arrangement and bypass the consent requirements under the 2015 Notes.

Rose J, applied the judgment set out in Re APCOA Parking Holdings GmbH, and found that there was a sufficient connection, noting that the 2015 Notes had always included a provision for a possible change to the governing law and that this formed part of the bargain that commercial noteholders had signed up to. She also noted that the legal experts present agreed that New York law did not prohibit a change in law.

Additionally, Rose J, noted the existence of certain other factors which further satisfied her that there was a sufficient connection with England, namely that some of the guarantees provided by Ukrainian companies within the group were (and always had been) governed by English law, DTEK had moved its centre of main interests (“COMI”) to England, and DTEK had substantial assets in England, namely cash in its London bank account.

Finally, legal opinions confirming the effectiveness of the Scheme in the Netherlands, where DTEK was incorporated and in the various jurisdictions of the guarantors further assured the court of the practical effect of the Scheme.

As regards to the overall fairness and the exercise of the court’s discretion, Rose J was satisfied that (despite some mooted but unsubstantiated opposition) there was no reason not to sanction the Scheme.

Takeaways

This case proves that APCOA was not an anomaly and we can expect to see more non-English companies seeking to restructure their notes and bonds through English schemes of arrangement, thereby sidestepping approval requirements in their debt documents. Whether or not this is a good thing is up for debate, but it will certainly prove to be a topic of discussion in any upcoming high yield bond issuances. Specifically, noteholders will need to consider if a change in governing law should be subject to majority noteholder approval (as is the current market norm), or if the ramifications of a change in law are such that it should require all or supermajority noteholder approval. How this will play out is unclear, but we are sure it will be interesting….

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Compare jurisdictions: Restructuring & Insolvency

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